How Humans Contribute to Natural Disasters and Large Claims, Without Meaning To
Flood claims are awful. If you have ever had or dealt with water damage, much less a flood, you know the damage and repairs never seem to end. A house burns down and is rebuilt. A house floods and where does one even begin tearing down and then rebuilding?
A reasonable person might think humans would avoid building in flood prone areas, right? We all know that if a government provides subsidized flood insurance, at least in our society, people will definitely build in areas certain to flood. But even without subsidized flood insurance, would people rebuild in those areas? The answer most likely is "Yes." In a study published in Nature Communications (“Nature Communications, "How Long Do Floods Throughout The Millennium Remain In The Collective Memory?" 7 March 2019), scientists studied human collective memory relative to building in natural disaster zones. They studied a Central European river basin that has 1,300 towns and villages examining 900 years of society in those villages and river basin.
The study did not address insurance -- maybe because homeowners policies have only meaningfully existed for the last 75 years of the 900 years studied. The scientists defined a catastrophic flood as one where the river's runoff was at least 30 times greater than normal. Such floods occurred about seven times in the last 900 years. Rivers running 30 times harder than normal carry away a lot of buildings and infrastructure. I can't even imagine a river running that hard.
Inhabitants did not return to the flooded areas quickly. Once these huge floods wiped out almost everything in their paths, people rebuilt higher. They lost and they learned. However, following one of these massive floods, people would begin building new infrastructure, homes, and buildings closer and closer to the river again and again. At first the building crept toward the river and then up close. Every time. Those who do not study and learn from history, will make the same mistakes over and over and over again.
The study found people simply lost adequate collective memory, memory that was adequately personal. Bad things only happen to others.
The bigger lesson here may be to accept that bad things will happen to you. This time is not different, and no one is so special that lessons do not apply to them. Currently, the best example I can think of is how so many people think they will not become a victim of a cyber-crime. I can understand some regular Joe thinking this, but major cities, governments, universities, Fortune 500 firms, much less small and medium sized organizations' decision makers think that for some reason, they are blessed, and the cyber criminals will not find them. It is a human bias to believe that we are special - and such bias does not always serve people well.
We had a guy build a new home near us. It was in a beautiful location in the foothills of Colorado. Being an environmentally conscious person, he used the land to build a "green" home. He built into the hillside as doing so decreases heating and cooling costs and maintenance. An old guy asked him why he'd build a beautiful house in a dry wash? Building into the land on three sides was easy because he'd built into what amounted to a dry creek with 8' banks on both sides. The new guy answered by describing the beauty and natural insulation and other tree hugging beatitudes. The old guy asked, "How do you think this wash was carved?" The new guy said it was ancient (meaning before last year when he bought the property). I heard a rumor later that a semi load of broken 2X4's was found clogging culverts seven miles down stream after an especially heavy August thunderstorm. Those storms occur about every five years in that area. Interestingly, the house was not in an official flood zone.
I live in a forest and have for thirty years. It is a good and rational practice to follow the U.S. Forest Service's FireWise advice regarding clearing space around one's home. However, a huge proportion of people living in western forests do not clear space around their homes. They love their trees and they know a fire will not happen to them because it hasn't happened yet. A fire occurs and there are news reports about global warming and bad insurance companies, but reporters rarely ask, "Did you clear space around your house and obtain a forest service certification?"
Humans make decisions based on lack of personal experience which leads them to believe catastrophes will not happen to them. The probability of such a catastrophe happening in their lifetime is probably at least 50% and results in humans making natural catastrophes much worse. For the insurance industry, this is a major problem because insurance is designed specifically to re-establish people's financial well-being following a catastrophe. However, if people believe they have been graced with a protective bubble, they will not buy the insurance they truly need. To get people to buy the coverage they need, one must delicately pierce that bubble.
Insurance companies are obviously run by humans, and they regularly make the same bad decisions. A great example of this involves Colorado hailstorms. I was working for an insurance company in the late 1980's when I assisted in a study of hail claims throughout Colorado. As I remember the results, every town along the Front Range (where everyone lives), had been hit by major hailstorms at least once in the last 100 years (except one). I believe it was in 1990 that a humongous hailstorm hit the Denver metropolitan area. The property insurance market virtually froze. Insurers stopped writing new business. Talk about a hard market! If a carrier was writing homes, it was usually limiting agents to only X homes per month and that "X" was usually in the single digits.
Then a change in weather patterns averted major hailstorms in the area for about 25 years. This was surely an historic anomaly. However, quite a few insurance companies saw the great economy here and entered the state writing property insurance without restrictions. Profits were great because the market was priced for hail, but without the hailstorms, the profits were strong. Somehow or another, the new entrants failed to look at the past, or at least past the last five years. Hailstorms have since returned with a vengeance over last 5-7 years. These companies, at least the ones to whom I've spoken, are sorry they ever wrote property in Denver.
A carrier called me two years ago asking for advice about entering Colorado. I advised them not to think or tell agents that they, the carrier, were special and that hailstorms would not affect them. That is what every carrier says. Furthermore, I advised them not to come into the state if they are not prepared to pay huge hail claims. Hail is nothing new and it will return and return and return. I advised that unfortunately, you (the carrier) are not so special that the homes you insure will be protected by a bubble. Of course, my advice was ignored because they knew they were special. Their loss ratio skyrocketed due to hail claims.
Sometimes a person simply must experience something for themselves. On both sides of the insurance industry though, the carrier and the consumer, such human behavior is a significant risk factor. Insurance is designed to cover the unexpected, the uncontrollable, the significant losses. Yet humans at carriers and consumers possess normal human brains. Human brains simply are not designed well for considering abstract but certain, infrequent hazards. If the hazard is new, humans tend to go bat crazy and if the hazard is old, they tend to believe they are blessed. Most hazards happen infrequently and people do not get that personal experience until it is too late.
There is money to be made though. As a regular human, ask why that dry creek bed is there. This is the earth and not the moon. Ask if maybe a hail proof roof is warranted (carriers really should accept reality and encourage hail proof roofs rather than refusing to insure a concrete building, concrete on all six sides, due to its hail exposure as I saw a carrier do recently). Ask, why will that river not rise again. Ask, why a major hurricane will not hit Florida again and why carriers insuring homes there should not be exceptionally well capitalized (not just adequately capitalized). Ask why cyber thieves will not choose to attack you when their bots attack at random.
If you are selling insurance to people who believe they are so blessed, you must learn the techniques required to safely help them understand they really are just lucky, not blessed. Stories help but questions are better.
If you are running an insurance company, complete awareness that high deities do not like you any more than they like any other insurance company is paramount. Hailstorms are pretty indiscriminate. However, do not run away from taking risks. That is the reason insurance companies exist. I know technology exists, at least theoretically, now to predict which homes will have a claim in the future and some carriers are refusing to renew these homes for no other reason than their algorithm tells them to do so before a loss occurs. No one needs to buy insurance if insurance companies are only going to insure homes that will not have a loss. It is an oxymoronic stance.
Instead, go back to rational underwriting and risk mitigation combined with pricing. Some call this common sense.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.